3.3.2 Legal relationship entailing reciprocal performance

As mentioned in Section 3.3.1, for a transaction to be made ‘for consideration’, the CJEU requires that a legal relationship must exist, pursuant to which there is reciprocal performance.1 This means that a legal relationship should not impose unilateral obligations (as mentioned above) but rights and obligations for both parties to the legal relationship, based on which one party performs a supply of goods and or services for the other party where the other party agrees to pay something (cash, goods, services or a combination thereof) in return. Combining the requirement for a legal relationship entailing reciprocal performance with the fact that the CJEU requires the stipulation of a price or consideration, this legal relationship should also include the stipulation of a price or consideration in return for a supply of goods and/or services. If parties have not (specifically) stipulated that a price or consideration is paid in return for the supply goods or services, the payment is not considered (part of the) consideration for those supplies, unless specific rules dictate that these payments should be considered (part of) the consideration.2 These last rules aren’t relevant for determining the VAT treatment of voucher transactions or loyalty schemes and therefore outside the scope of this research.

If parties have not (specifically) stipulated that a price or consideration is paid in return for the supply of goods or services,3 the payment is not considered (part of the) consideration for those supplies.4^,5 The CJEU also ruled a number of specific cases where, even though no specific amount payable was agreed or included in the reciprocal agreement, there was still a payment or consideration for a supply. In all of these cases, the reciprocal performance was clear from and implicitly agreed by applying or following the relevant (agreed) ‘business model’ or ‘sales method’.6

In two of those cases (the ‘Glawe-case’ and the ‘First National Bank of Chicago-case’),7 a VAT exemption applied to the supply and the ‘supply’ consisted of money (cash). For these specific types of transactions (where money is the object of the transaction), the CJEU has explained that technical difficulties exist in determining the amount of the consideration received in return for the transactions. 8 However, this in itself cannot justify the conclusion that no consideration exists. For these types of transactions, it is apparently not necessary that (both) parties know the exact amount they pay or receive from each individual customer or for every single supply for the payment for the transaction to qualify as a consideration, as long as parties understand that they make a(n implicit) payment in return for an agreed supply. Technical difficulties may also arise when determining the amount of the consideration in barter transactions (where goods and/or services are supplied in return for goods and/or services), because the ‘subjective’ value of the consideration received is not agreed as such.9 Be that as it may, it is clear that barter transactions also constitute ‘quid pro quo’ types of supplies for consideration.

As mentioned above, as a general rule, it must be clear from the legal relationship what it is that the price/consideration is paid for.10 This means that there should not only be a direct link between the payment and the transaction, but that this direct link should be ascertainable from the agreement.11 This is particularly relevant in cases where more than one good or service is supplied for a single price that is lower than what should normally be paid for the combination and in cases involving voucher schemes, because the VAT treatment of transactions that are performed free of charge differs from the VAT treatment of transactions performed at a discount.12^,13 Examples are promotional schemes such as ‘two products for the price of one’, ‘buy one, get one free’ and the supply of vouchers with a certain quantity of purchases that can be used to obtain goods from a gift catalogue without additional payment. Does the customer also pay (part of) the consideration for the second good that is advertised as being supplied for ‘free’? Or for the ‘free’ vouchers that he receives with his purchases or the goods or services obtained by redeeming them? I will elaborate on how to determine whether a consideration should be allocated to all elements of a composite supply in Chapter 4. The VAT treatment of voucher transactions is discussed in Chapter 9.

It is also clear from the CJEU’s Tolsma-case (about an organ player busking in the streets) that performing services for everyone to enjoy, irrespective of whether they paid Mr. Tolsma or not, does not create sufficient reciprocity. In my view it is apparent form this case, even though it was not explicitly mentioned, that in this case it was not possible to ‘create’ reciprocity by the fact that (and at the moment that) a passer-by decided to pay Mr. Tolsma.

In the Tolsma case, there were not only people that decided to pay Mr. Tolsma, but also people that decided not to. The people that decided not to pay still had the possibility to enjoy or receive the same service (the musical performance by Mr. Tolsma) as the people that did (decide to) pay. Also, the amounts paid were not agreed or advertised, and no direct relation existed between the amounts paid and the ‘amount of service received’. Passers-by did not ‘agree to pay’, they ‘decided to pay’. This is different from, for example, a business that places boxes of candy in offices where people that decide to take candy, have to leave a certain (predetermined or advertised) cash amount, or even from restaurants where people only pay what they think the dinner was worth. In the first of these two examples, it is clear that (if the rules are followed), only people that (implicitly) agree to the rules and pay will receive candy and that only people that take candy have to pay (the advertised amount). In the second of those two examples, a restaurant owner decides to supply restaurant services to a specific (group of) individual(s), excluding others from whom he expects no payment and will not get payment. Payment received from this (group of) individual(s) therefore, in my view, constitutes consideration for the agreed restaurant services. People actually agree to order a meal from the restaurant and they make a payment in return for that agreed supply. In my view, the main difference is that Mr. Tolsma cannot exclude people that don’t pay from benefiting from his music.14 Also, the restaurant guests choose whaf the want to eat, the people listening to Mr. Tolsma play could not decide what they would get to listen to.

If a supplier performs an activity where not everyone that benefits from this activity pays for the supply or in the opposite situation, where not everyone that pays actually benefits from an activity, the link between the payments received and the activity may not be sufficiently direct for the activity to be subject to VAT.15 However, in my view, the fact that some ‘beneficiaries’ pay for a supply and others don’t, does not always have to mean that no direct link exists. The fact that someone else than the (main) ‘beneficiary’ of a supply pays for the supply is not such as to affect the direct link between the supply made and the consideration received, the amount of which is determined in advance on the basis of well-established criteria.16 An example can be a person that pays a bakery to send someone else a cake for their birthday. Even though the person celebrating her birthday physically receives the cake (and can, therefore, be considered the ‘beneficiary’ of the supply), the person that has the legal relationship with the baker is considered the ‘recipient’ of the supply (from a VAT perspective). An agreement should be in place with the recipients of the relevant transaction. In these cases, there is still ‘a legal relationship pursuant to which there is reciprocal performance’, and therefore a supply for consideration.17

The payments received by the supplier should, however, be based on the legal relationship between himself and the other party agreeing to the supply and the payment for there to be a direct link between the supply and the payment (so that the payment is consideration paid in return for the supply). An example of a payment received ‘in connection’ with a supply but not ‘in return’ for a supply is a payment received by a supplier of goods or services from a factoring business to whom he has sold all his (current and future) amounts receivable (i.e. the amounts to be received for his supplies, or the ‘considerations’ for his supplies). The money received from the factoring company is not paid to him as a result of the agreement between himself and the recipients of his supplies, but as a result of a legal relationship between him and the factoring company. Therefore, no direct link (in the VAT sense) exists between the supplies made to the recipients of the supplies and the payments received by the factoring company. They are, therefore, not ‘consideration’ for his supplies.18 The same principle applies to money paid to a supplier by its insurance company as a result of the ‘insurance against bad debts’ that the supplier has taken out.19

Form the CJEU’s Baštová-case,20 it is clear that two (or more) parties can agree a specific amount that will be paid to one of the parties after that party has ‘achieved’ a pre-defined goal without that achievement being considered a supply (of goods or services) that is subject to VAT. In the Baštová-case, the agreed achievement was a specific placement in a horse race. Something similar applies to a lottery organisation paying the owner of the winning ticket a certain pre-defined (agreed) prize. In such cases, it is the achievement of a(n un)certain result (the placing of the horse at the end of the race, holding the winning ticket) which, as such, gives rise to the award of (prize) money. Even where the race organiser or lottery business has committed himself to awarding such a prize (e.g. a fixed amount known in advance), the fact remains that the award of the prize is thus subject to a specific occurrence and to a degree of uncertainty. In my view, the outcome of the Baštová-case revolves around the fact that ‘winning’ or ‘achieving a specific placement’ is not a supply of goods or services, and therefore any payment received cannot be consideration for that achievement. There is no reciprocal performance where a person is paying someone for achieving a placement in a tournament. That is, in my view, the main reason that both the CJEU and the referring court in the Baštová-case focus on possible actual services provided by the ‘contestants’ for which the prize money could be consideration. In the Baštová-case, that service could apparently be ‘putting a horse at the disposal of the race organiser’ (both the referring court21 and the CJEU22 consider that option). In my view, the CJEU rightly dismisses the possibility that the prize money can be consideration for ‘putting the horse at the disposal of the course organiser’. According to the agreement, or based on the legal relationship, between Baštová (who put horses at the disposal of race organisers by having them compete in races) and the race organiser, the only reason for payment of prize money was the achievement of a predetermined result, where it is uncertain whether that result will be achieved.

However, differences exist between the facts of this case and prize money granted to, for example, lottery winners. In a lottery, people will pay for competing by buying one or more lottery tickets. They pay for the opportunity to compete or, rather, for the chance to win. They do not actually perform any service at all. They are the recipients of a service (taking part in a game of chance). The horse owners do perform an activity by having their horses perform in the race. They have to enter and participate in the race in order to (have a chance to) win. Only by being the best performer will they receive prize money. In that sense, it can be argued that the prize money is payment for a supply of a service, contingent on the result of the service. Under that assumption, the prize money paid to the placed horses (or their owners) can be compared to paying the real estate agent that manages to sell a specific property, where several real estate agents were contracted to provide that service. However, in my view, the object of the agreement between a home owner and one or more estate agents is not just the result, but the entire process (valuating the property, marketing the property by advertising it on line, in a shop window and in brochures, ensuring that flattering photos are taken of the property for promotional use, showing the property to potential buyers and negotiating a price). The ‘service’ actually provided and agreed between parties is, in my view, not the actual sale but the activities that are aimed at achieving the sale. Without the sale, there is still reciprocal performance (agreed activities in return for payment). The sale, in other words, is the result of the agreed service. If only one real estate agent gets paid because he or she is the one that, in the end, manages to sell the property, the consideration is not paid for the result but for the services provided that have led to that result. The payment of the agreed consideration is contingent on the result. In my view, however, the payment is still consideration for the supply of the services provided, and therefore subject to VAT.23 This is different from the horses (or horse owners) competing for prize money in the Baštová-case. In that case, in my view, the object of the agreement regarding the payment of prize money is the placement in the race. As I argued earlier in this Section, achieving placement itself is not a service in the sense of VAT. In the Baštová-case, the CJEU states that it is apparent from the Court’s case-law that the uncertain nature of the provision of any payment is such as to break the direct link between the service provided to the recipient and any payment which may be received.24 From this very general assertion, some scholars conclude that situations as I just described, where the payment for an agreed service is contingent on the result of the service, the payment is not consideration in the sense of EU VAT.25 I disagree, as I will now explain.26

In its reference to its own case-law when making the above assertion (i.e. that the uncertain nature of the provision of any payment is such as to break the direct link between the service provided to the recipient and any payment which may be received), the CJEU explicitly mentions the “judgments of 3 March 1994, Tolsma, C-16/93, EU:C:1994:80, paragraph 19, and of 27 September 2001, Cibo Participations, C-16/00, EU:C:2001:495, paragraph 43)”. The reference to the Tolsma case concerns the fact that the money received by busking is not a consideration, even though “a musician such as Mr Tolsma solicits money and can in fact expect to receive money by playing music on the public highway. The payments are entirely voluntary and uncertain, and the amount is practically impossible to determine”. I consider it relevant that this is not the only ground for the CJEU to consider the money received by Mr Tolsma not to be consideration for his music. (At least) equally relevant is the fact that no legal relationship exists between Mr Tolsma and the people paying him. The CJEU states that “the 'supply of services effected for consideration' (…) does not include an activity consisting in playing music on the public highway, for which no remuneration is stipulated, even if the musician solicits money and receives sums whose amount is however neither quantified nor quantifiable”. In my view, the fact that the amount of money received is neither quantified nor quantifiable is a result of the fact that the sums received were not agreed between parties. This is different from the Baštová-case.

The reference to the Cibo case concerns the fact that dividends received by a shareholder are not consideration from a VAT perspective, because “in view,specifically, of the fact that the amount of the dividend thus depends partly on unknown factors and that entitlement to dividends is merely a function of shareholding, the direct link between the dividend and a supply of services, which is necessary if the dividends are to constitute consideration for the services, does not exist even where the services are supplied by a shareholder who is paid dividends (Floridienne and Berginvest, paragraph 23)”. Again, the uncertainty regarding the amount of the money received is only part of the grounds for the CJEU to decide that dividends are not consideration for a taxable supply. In other CJEU case law, the court emphasizes the fact that “the mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefrom on a continuing basis because any dividend yielded by that holding is merely the result of ownership of the property”.27 In another case, the CJEU explains why certain features of dividends account, in particular, for their exclusion from VAT: “First, it is not in dispute that the existence of distributable profits is generally a prerequisite of paying a dividend and that payment is thus dependent on the company's year-end results. Second, the proportions in which the dividend is distributed are determined by reference to the type of shares held, in particular by reference to classes of shares, and not by reference to the identity of the owner of a particular shareholding. Lastly, dividends represent, by their very nature, the return on investment in a company and are merely the result of ownership of that property. In view, specifically, of the fact that the amount of the dividend thus depends partly on unknown factors and that entitlement to dividends is merely a function of shareholding, the direct link between the dividend and a supply of services (even where the services are supplied by a shareholder who is paid dividends), which is necessary if the dividends are to constitute consideration for the services, does not exist”.28 As in the Cibo-case above, the CJEU states that no actual service is performed in return for dividends as they result from the mere ownership of the shares. In my view, this is significantly different from the consideration received by a successful real estate agent for selling a property. In that case, as I argued above, an agreed service is performed in return for an agreed consideration, where the payment of the consideration is contingent on the (more or less unpredictable) result of the performance of those services. This means that, despite the fact that the CJEU has indeed made the above assertion, further clarification of this point of law is in my view not required.

As mentioned, as a main rule it should be clear from the agreement exactly what it is that the price/consideration is paid for as well as what the (amount or method of calculating the) consideration is.29 The term ‘clear’ is not as strict as it may seem, though. There are situations where, even though the exact (elements that make up the) supply is unknown, the supply still qualifies as a taxable supply, because not exactly knowing what will be supplied is part of the agreement. Examples are the supply of an all-inclusive holiday, a transaction where a customer puts a coin in a capsule vending machine in return for the ‘surprise good’ in the capsule that comes out or asking a chef in a restaurant to make you a ‘surprise dinner’ for an agreed amount. These are all examples of transactions where the fact that the ‘exact’ nature and/or amount of the goods and/or services that are supplied is not known but where this ‘unknown factor’ is an element of the agreed supply of those unknown goods and/or services. In these situations, a direct link between the payment and the supply still exists.

In some cases, parties involved in a transaction may enter into an agreement to perform a certain transaction for consideration only because they wish the relevant VAT rules to apply to their transaction, whereas the accrual of a tax advantage constitutes the principal aim of the transaction or transactions at issue.30 If the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant EU VAT rules, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions and it is apparent from a number of objective factors that the essential (or rather, principal, JB)31 aim of the transactions concerned is to obtain this tax advantage, the transaction may be considered abusive.32 Abuse of law is outside the scope of this research. I refer to the many publications regarding this subject for further reading. In these cases, the envisaged VAT treatment does not apply, because parties cannot rely on the application of the EU VAT rules where the relevant transaction(s) constitute(s) an abusive practice.33

The requirement that the supply has to be sufficiently well defined in the agreement is also relevant for determining whether prepayments (or payments on account) for a future supply of goods or services have VAT consequences, even though prepayments are mainly relevant for determining the tax point and not the nature of the transaction. If, for example, parties agree to the supply of an insufficiently specific amount of goods against a payment that is to be made (well) in advance of the supply, the payment cannot be considered as prepayment for the supply of goods from an EU VAT perspective.34 This would mean that the tax point for the subsequent supply is not moved forward to the time when the (pre)payment is received, which would be the case if the supply would be sufficiently well defined.35

It is also possible that certain elements of a transaction are not specified in the agreement covering the transaction, but that it is economic reality that they are still part of the agreement. This is often the case for packaging materials and other elements that are ancillary to the main element(s) of the supply. If a customer goes to a supermarket to buy, for example, sweets, he also purchases the individual wrappers containing the sweets as well as the bag in which the sweets are contained. These packaging materials are not an explicit part of the agreed transaction between the seller and the customer – they will have agreed on the sale and purchase of a certain quantity of specific sweets. The packaging is an implied part of that transaction and is implied to be part of the agreement between supplier and customer. This is, in my view, based on the economic reality of that transaction, in the sense that it is a usual business practice. No part of the total price is, nor should be, allocated to the packaging. I consider the packaging to be a ‘dependent ancillary element’ to the supply.36 I define that as an element that it is not explicitly agreed because it is only intended as a means of better enjoying the principal or main supply, but that is still an essential and integral element of the supply. A shop selling wine will not include a separate line item for the bottle on the invoice, nor will it charge the customer separately for it. The same applies to crisps in a bag, sardines in a tin and a soft drink in a can. In many EU Member States, the supply of (non-alcoholic) food and beverages are subject to a different VAT rate than the packaging. That is, however, irrelevant because, as mentioned, I consider the packaging ‘dependent ancillary elements’ to the supplies described, meaning that often the agreement underlying the sale will not specifically include these elements and that no part of the agreed consideration should be allocated to these elements. However, this does not mean that these elements are provided for free. They are such integral part of the supply that they are absorbed as part of it. I consider the cost of packaging (and other dependent ancillary elements to a supply) to be implicitly included in the price of the products, also from a VAT perspective. This is relevant, because it means that there is no supply ‘free of charge’ that could trigger VAT consequences.

This approach seems to be supported by the rationale of the EU VAT Directive, where ‘incidental expenses’ such as packing or packaging are considered to be part of the taxable amount.37 These provisions apply where the supplier actually charges these expenses to his customer, but they are an indication of the fact that these transactions should not be considered separately (not even when charged separately).